The Fund Industry: How Your Money is Managed
I guess from a business point of view in a book all about mutual funds, if one of the results of open architecture is sort of I would say some type depressed pricing in the mutual fund industry, what is the mutual fund industry doing to sort of combat that? Are they focused more on innovation and creating new products? You certainly see firms that are really embracing lower pricing and making that one of their selling points.
I think the issue for the industry is more that it becomes tougher to differentiate your products. So, advertising for instance has become critical, grand differentiation.
You can no longer rely on an exclusive set of sales people to promote your products. You really have to make them stand out in the mind of consumers. Do you think these sort of same trends are pushing some of the mutual fund companies to buy ETF assets also? Hamacher : Yes. I mean consumers are becoming more attune to pricing.
As we talk about in the book too, ETFs are largely index funds. There has been a general trend toward increasing use of index funds, though that tends to move in cycles. The combination of the two has really driven more interest in ETFs, both from consumers and from fund management companies. I think you do a fair job in the book sort of benchmarking mutual funds against ETFs, obviously.
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They have generally been handled by different types of firms. The fact that they are index funds as opposed to most of the industry still focuses on actively managed products. They also appeal to a different audience. ETFs are more likely to be used by institutional investors than traditional mutual funds.
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But, because ETFs have to disclose their portfolios at least daily, it makes it tough for them to be actively managed. Do you see some of the competitive dynamic of ETFs influencing to the positive the mutual fund industry in terms of I guess new strategies? Hamacher : Well, a lot of the introductions of the new product types in the ETF area have been extremely aggressive funds.
So, I think the innovations have been more the ability to trade throughout the day were, I say, the innovations that have been seen as most valuable; the ability to trade throughout the day, the constant downward pressure on costs. The whole idea of an indexer getting into the actual hands on management game is really interesting. Just they see an opportunity there to acquire assets, or is it a different type of product? You have to have the distribution too. I got a chance to ask Hamacher a personal question.
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After years of working within the mutual fund industry she now works at NICSA, working with the mutual fund industry. I asked her how that transition went. I really love the variety of it too. I need help. Table of Contents More details Relations Report error. Foreword Preface to the second edition Acknowledgments An investors guide to mutual funds Investing through mutual funds How mutual funds work Researching funds: the user guides Comparing mutual funds Appendix to Chapter Gathering fund assets through retirement plans About the companion website About the authors.
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Fee structures are really part of marketing, getting the investors to pay attention. When you get right down to it, though, if you save five basis points in an expense ratio, you can look at it on the flip side: how much of additional investment return do you have to have in order to make up that difference? KP: I think they can play a very important role. I think interval funds are a brilliant invention. When you have relatively illiquid investments such as real estate or precious metals in a traditional mutual fund, the portfolio manager has to retain a cash balance to meet the potential redemptions from shareholders.
Holding onto cash or cash-equivalents dilutes fund returns, so that is unattractive.
How mutual funds work
With an interval fund, you can only redeem periodically at certain intervals, every 30 days, or quarterly, whatever the prospectuses might dictate, which gives a portfolio manager much more flexibility to be more fully invested and give the portfolio manager a warning of when they need to sell assets to meet redemption requests.
So I think closed-end interval funds can be very valuable, providing access to different asset classes that might not have been available before or because of the structural limitations. Click here to learn more about interval funds. Financial literacy is just the very bottom line, I guess, understanding dollars and cents.
The more sophisticated the investment markets become, the more there is need for the investor to be educated about what alternatives they have. Absolutely not. Follow our Education Section to learn more about mutual funds. Kip Meadows talked us through the value that Nottingham brings to the table for helping launch and manage different investment vehicles such as mutual funds and ETFs.
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